Barbados economy: Quick View - Barbados to enter selective default

On June 1st the newly elected government announced that it will enter selective default on its foreign debt. In addition, an IMF team arrived in the capital, Bridgetown, on June 5th in order to assess the current crisis.

Analysis

The new prime minister, Mia Mottley, who is also the minister of finance, economic affairs and investment, outlined a number measures to address the country's severe economic difficulties, which include low—and falling—international reserves, high debt levels and meagre growth. The new government also disclosed that official figures were underestimating the country's liabilities; public debt, on its broadest definition, amounts to 175% of GDP, compared with the previously believed 131%. In addition, Ms Mottley revealed that US$50m of debt service payments are due on June 18th, annual interest costs amount to Bd$800m (US$400m) and reserves are down to US$220m—equivalent to a mere seven weeks of import cover.

Ms Mottley plans to negotiate a comprehensive debt restructuring in order to increase liquidity and economic stability in the short term. However, given the severity of the country's financial woes, she also announced the immediate suspension of payments to external commercial creditors, thus falling into a selective default. The government will attempt to effectively meet interest payments to domestic creditors, but these have been asked to rollover principal maturities until restructuring is complete. The IMF mission, which arrived on June 5th for a three‑day visit, will discuss the country's current situation and potential balance of payments support.

On June 11th Ms Mottley is expected to announce a number of expansionary fiscal policy measures, most notably the abolition of the 10% National Social Responsibility Levy (an import tariff) and the reduction of the value-added tax (VAT) rate by end-2019. Spending proposals include investment in sewage systems, the public hospital, roads and other infrastructure. The minimum wage will be raised by 28%, with a tax credit for low earners and a mortgage relief programme to prevent foreclosures. In addition, the government also came to an agreement with public servants, in which they will obtain a 4.5% salary increase.